CL1 Concept Test – Paper 1

Question 01

1.1  You are the audit senior of Manisha & Co. and have worked on the external audit of Koswatta Ltd, an unlisted company, since your firm was appointed as the external auditor two years ago. Koswatta Ltd owns a chain of 10 restaurants and is a successful company. Koswatta Ltd has always been subject to national hygiene regulations, especially in relation to food preparation process and any non-compliance can result in a large fine or closure of restaurant concerned.

The board of Koswatta Ltd informed you that national hygiene regulations have been updated and now much more stringent and onerous than before and board struggled to differentiate its responsibility and those of auditors with reference to the prevention & detection and compliance with regulations. Which of the following best describes the Manisha & Co.’s responsibility regarding compliance with hygiene regulations, in line with SLAuS 250?

(1) Increase sample sizes

(2) Reduce control risk

(3) Assign more experienced staff to the engagement team

As the audit manager in the above scenario, which of the following is the most likely action you would take when drafting the audit report?

In the above scenario, you are most likely to:

Question 02

BNB Bank PLC (BNB) is a bank listed on the Colombo Stock Exchange that provides retail and corporate banking services in Sri Lanka. It prepares its financial statements in accordance with Sri Lanka Accounting Standards. BNB’s financial year-end date is 31 December.

BNB operates as a licensed commercial bank under the license issued by the Central Bank of Sri Lanka (CBSL), and is subject to the Banking Act and regulations issued by CBSL. In addition, BNB is also required to comply with other regulations such as the Financial Transactions Reporting Act No. 06 of 2006, Prevention of Money Laundering Act No. 05 of 2006 etc. 

BNB is a part of a complex and diversified group of companies comprising many unlisted subsidiaries. It also holds many direct and indirect subsidiaries, a lot of which are unlisted.  The ultimate parent of the group is a family-owned business. The family is large and extended, and most members of the family have established their own business enterprises as well. These business enterprises frequently transact with BNB, its subsidiaries and associates. 

BNB was looking to purchase a land in the business area of Colombo to set up a state-of the-art office for its premier and corporate customers. A real estate company approached BNB with a plot of land that suited BNB’s requirement. The board of directors approved the purchase of the land at a price of Rs. 2.5 billion, and it was purchased on 14 October 2019. 

In November 2019, BNB’s compliance department discovered that the real estate company that sold the land to BNB was owned by the wife of a son in the family that ultimately owned the group. However, BNB had not disclosed this transaction to the regulator nor the Colombo Stock Exchange as the management was not aware that the real estate company was a related party at the time of the transaction.

This matter was brought to the attention of the related party transactions review committee of BNB, which then recommended BNB to sell the land as soon as possible. Consequently, the land was classified as a non-current asset held for sale. As these non-current assets are required to be measured at fair value, the management obtained the services of an external valuer to perform the valuation of the land as at 30 November 2019.

The management stated that it was unlikely that the land will be sold before the financial year-end of 31 December 2019, and therefore the land will be reflected in the statement of financial position as at 31 December 2019 at the market value as at 30 November 2019.

According to the regulations issued by the Securities and Exchange Commission of Sri Lanka (SEC), the nature and materiality of the related party transaction is such that BNB is statutorily obligated to make specific disclosures in its annual report. However, the management does not intend to make any of these disclosures in its annual report. 

You have been assigned to the audit of BNB for the year ending 31 December 2019. This is not the first year of audit. It is now December 2019 and you are planning the audit of BNB. 

Required:  

(a) Discuss three (04) risks of material misstatements at the assertions level for significant account balances and disclosures of BNB for the year ending  31 December 2019.  (8 marks)

Question No 03

The objective of an audit of Financial Statements is to enable the auditors to express an opinion whether or not the Financial Statements are prepared in all material respects in accordance with an applicable financial reporting framework.

Outline three (03) areas where professional judgments are required in an audit of Financial Statements.  (3 marks)

State three (03) factors that should be considered when a risk is determined as a significant risk   (3 marks)